Ex-Ambassadors Warn Against NAFTA Changes

Trump threats against NAFTA would hurt US and Mexican economies, experts say.

BY JOACHIM BAMRUD

Two former US ambassadors to Mexico and a former Mexican trade negotiator warn against exiting or renegotiating the North American Free Trade Agreement (NAFTA), as Republican presidential candidate Donald Trump has called for.

“Our horrible trade agreements with China and many others will be totally renegotiated,“ Trump said in his nomination acceptance speech at the Republican National Convention in Cleveland, Ohio last week. “That includes renegotiating NAFTA to get a much better deal for America – and we'll walk away if we don't get that kind of a deal.”

Trump earlier also threatened that if Mexico doesn’t pay for his “wall” keeping illegal Mexicans from crossing the US border, he would put a 35 percent tariff on all exports from Mexico to the United States.

“The result undoubtedly would be a similar tariff imposed on all U.S. exports to Mexico,” says James R. Jones Chairman of ManattJones Global Strategies. “Since Mexico is our second largest export market, such a tariff war could severely cripple economic growth or worse in both of our countries.”

Jones served as US ambassador to Mexico from 1993 to 1997 during the administration of President Bill Clinton, a period that saw the negotiations of side agreements as well as the formal implementation and the first few years of the treaty.

Antonio Garza, US ambassador to Mexico between 2002 and 2009 during the administration of President George W. Bush, also warns against renegotiating NAFTA.

“If the renegotiated changes made it more difficult to conduct trade or to invest across the region, then the impact on the U.S. economy would be swift and negative,” he says.

Luis Rubio, a partner at the Mexico office of Jones Day who was a member of the team that negotiated NAFTA on behalf of the Mexican government, warns that the renegotiating NAFTA will send a signal that the United States also may renegotiate other trade deals in the world.

“Any proposal to renegotiate NAFTA will certainly give a signal to other countries with whom the US has entered into trade agreements that a renegotiation of the terms of their agreement is very possible, thus raising [concern] among foreign investors active in the United States,” he says.

Part of the problem with renegotiating NAFTA is that it created a complex intertwining of the North American economies.

“There are …many industries that have arranged their production processes across the three countries in order to take advantage of various competitive advantages or to be in proximity to final markets,” Garza says. “If NAFTA's rules were changed, then these companies -- which employ tens if not hundreds of thousands of people -- would have a tough and very costly time reorganizing their operations to stay competitive against their global competitors.”

That’s the case with the auto sector, but also many other manufacturing companies across industries.

Rich Turner, a senior manager of one of thelast denim manufacturing plants in the United States, told CNN that NAFTA is key to his company's survival — and for the 2,700 workers at the plant in Mauldin, S.C.

"Without NAFTA, we would be out of business," he says.

Meanwhile, a trade agreement renegotiating is complex and could take years, Rubio warns.

“For example, the applicable provisions to rules of origin could be really difficult to renegotiate as there are a lot of products that have origin in the three member countries such as automobiles where some of the parts are fabricated in the US which also have Canadian parts and are then modified and build in Mexico to be re-exported to the US, all under NAFTA’s umbrella,” he says.

Jones points to the impact a previous dispute with Mexica had on the US economy.

“When the U.S. failed to live up to its NAFTA obligations for cross-border trucking, Mexico imposed strategically targeted retaliatory tariffs that quickly showed pain to our economy,” he says. “It changed the political dynamics in America to honor our treaty obligations. So whatever Trump might do to disrupt NAFTA, I believe it is certain that Mexico will retaliate.”

Initially, Mexico would probably have negative economic growth as more than 80 percent of Mexican exports go to the United States, but the United States might suffer more as the country would quickly be known in global trade as an unreliable trading partner, Jones argues.

IMPACT ON MEXICO

For Mexico a renegotiation of NAFTA will have an even bigger impact, although the economy is now in a much stronger position than before, Rubio warns.

“Renegotiating NAFTA nowadays would not have the same impact that would have had 15 years ago, due to the consolidation of the World Trade Organization and the fact that more countries are looking at international trade agreements as a mechanism to aid their economies grow mainly due to the agreement or even elimination of tariff rates applicable to their products,” he says. “Notwithstanding this, any renegotiation of NAFTA’s terms would certainly impact Mexican economy as the investors would not look with confidence investing in Mexico if the terms under which they are investing now are in risk of being amended or eliminated."

Also, NAFTA provides for a disputes settlement mechanism which also provides investors the assurance that their investment in any of the group members will be secured by the terms of the agreement, Rubio points out.

CONGRESSIONAL RESTRICTIONS?

Experts disagree on what freedom a President Trump would have to renegiotate or exit NAFTA.

“What a President Trump could or could not do regarding NAFTA is a legal issue that is not yet clear,” Jones says. “By the Constitution, Congress is empowered with responsibilities over international trade. I don’t believe a President could abrogate NAFTA without the approval of Congress. However, a President could legally do certain things such as raise tariffs for reasons such as national security.”

Rubio also believes the US Congress would have to approve any changes.

“It would not be so easy for the US to withdraw from NAFTA as Congress approval is required.,” he says “For such approval, the Congress will study and analyze all the economic information related to NAFTA and it is not foreseeable that the conclusion will be in the sense that the application of the agreement has harmed US economy as such country has mostly benefited from the elimination and reduction of tariff rates and application of rules of origin. Furthermore, in the scenario where the withdrawal takes place, Canada and Mexico will be entitled to establish tariff rates to US goods and inputs which may affect US producers. Also, the withdrawal from NAFTA may entail the beginning of the US to systematically withdraw from other free trade agreement which may harm US economy. Let’s not forget how Brexit is affecting the UK and it has not yet formally started.”

However, Gary Hufbauer, a former deputy assistant secretary for trade at the Treasury Department who is now a senior fellow at thePeterson Institute for International Economics, told Reuters that Trump could unilaterally terminate NAFTA or any other free trade deal.Despite Trump’s threats to change or exit NAFTA and raise tariffs on products in Mexico, Wall Street is so far not sounding the alarm bells. Companies with heavy Mexico exposure that would be hurt by Trump’s policies – such as Ford and United Technologies Corp's Carrier Corp. -- have not yet seen any impact on their stocks, Reuters reports.

"For the most part, that suggests to me the investment community has not considered a Trump presidency a probable scenario at this point," Jack Ablin, chief investment officer at BMO Private Bank in Chicago, tells Reuters.

However if Trump does win the November presidential elections and the United States were to pull out of NAFTA, Mexico -- which has more free trade agreements than any other country -- would move swiftly to other trading partners, Jones predicts.

“If giving up America’s global leadership in commerce is what Trump wants, his threats against NAFTA and other trade agreements are the way to achieve it,” he says.